RBI Lowers the Minimum Risk Weight on Home Loan to Support Affordability

Affordable housing is the topmost concern of the government towards the Indian real estate industry. The urban population explosion makes it imperative for the authorities to think of better ways to make residential real estate affordable enough for the Lower Income Group (LIG) and the Economically Weaker Section (EWS). Continuous steps are being taken in this direction, the latest one being taken by the RBI.

RBI Lowers the Minimum Risk Weight on Home Loan to Support Affordability

The Reserve Bank of India announced on 29 September that it has decided to lower the minimum risk weight on home loan for lower amounts of loans that are sufficiently collateralized. There is also a reduction of 50 basis points in the Repo rates. These two are together expected to bring down the home loan interest rates. So you do not have to rely on an Loan Eligibility Calculator to assess your home loan needs, here is a detailed description of how home loan has become affordable with lower risk weight.

What is Risk Weight? The risk weight is assigned by the RBI to the banks on various assets owned by them. The loans lent out by the banks are also their assets and call for a minimum risk weight to be set aside by them as capital. It is a certain percentage of the value and is mandatory for the banks to maintain the Capital Adequacy Ratio (CAR).

As per the guidelines, loans of less than 75 lakhs and more than 75 lakhs have risk weights of 50% and 75% respectively. And the banks have to maintain a CAR of 9% on home loans. For example, if the bank lends out 60 lakhs as housing loan which has 50% risk weight (30 lakhs), they have to set aside 9% of 30 lakhs i.e., 2.7 lakhs as capital.

How does a lower risk weight affect homebuyers? As explained above, a higher risk weight calls for a higher amount to be set aside as capital resulting in a higher cost of capital for the banks. So the banks are averse about lending to sectors that carry a higher risk weight. But now that the minimum risk weight on housing loans has been reduced by the RBI, the lender banks will have a higher amount at their disposal. Now they can also lower the interest rates which was otherwise less doable for them.

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